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26 February 2024

When Tadawul sneezes, DFM catches a cold

By Mohammed Aly Sergie




When a stock market declines, brokers, analysts, investors and journalists immediately come up with some kind of rational explanation.
Yesterday, after the Saudi Tadawul index dropped 3.36 per cent, and the Dubai Financial Market (DFM) lost 7.50 per cent – most observers will undoubtedly blame the fear of a US recession, the never-ending subprime saga, or the flight of foreign capital.

If everything fails, “political and security tensions” are timeless robbers of market caps. Amid the chaos of a plunging index, Khaled Kurdieh, CEO of Mashreq Securities, gave a more sober and interesting view on the dynamics of the market.

He told Emirates Business last night the main trigger for the DFM’s decline yesterday was the rough start for the Tadawul.

The DFM began the day uneventfully – it rose slightly but remained mostly flat until noon. The market in Riyadh opens at 11am local time (midday in Dubai). Yesterday the Tadawul started its day down one per cent, and according to Kurdieh, that is when traders start noticing the boards.

“Some numbers came out of financial institutions in Saudi Arabia and stocks started reacting, which really echoed into our markets as well,” Kurdieh said.

Saudi Arabia, as the sleepy giant of the GCC, represents almost 60 per cent of the region’s total market capitalisation. Therefore, “when Saudi stocks get a pinch as a result of revenue results and correction, investors in our equity markets react”.

Kurdieh has witnessed this enough times to confidently conclude that this is not a new phenomenon. The major market in the region, Saudi Arabia, effectively governs the direction of the region’s economies.

“You cannot ignore the fact that we have a lot of GCC investors in our markets and when they feel the pinch in their local market they tend to worry about their investments in other GCC markets and therefore reduce their equity exposure.”

Those who invested in stocks listed on the DFM, both local and international investors, started the day on a slow note, waiting for the trends to emerge from Saudi, and to see if the sell-off by foreign institutional investors that began on Sunday will continue. In true “herd” mentality, as can be inferred from the graph on the right, the moment investors in Dubai saw a sell-off in Saudi they started unwinding their positions.

A lot of selling occurs automatically, triggered by stop orders, but Kurdieh also said these markets and many of the investors are heavily leveraged, so lenders do put out margin calls as shares decline.

“When any correction occurs, margin calls start going out to investors to top off their accounts or to liquidate, or they are requested to reduce their loan against their equity,” Kurdieh said.

Of course, while the veteran banker has some interesting ideas, Kurdieh also sees some more banal drivers in play. “We are seeing a sell-off all over global equity markets, and it does have an impact on our equity markets.”
Foreign investors have been selling major chunks of Dubai equities – this Sunday international investors sold almost Dh226 billion of shares in one day, with the DFM itself seeing more than Dh139bn in sales. But Kurdieh does not believe that this is a sign of capital flight.

“It is not necessarily that they are exiting, they are readjusting their exposure to emerging markets.”

Kurdieh said this “is not the end of the foreign investor” and the recent sell-off is not a sign of “panic”. The factors that are spooking investors across the world, the massive write-downs in the financial sector and the credit crunch, have forced asset managers to balance their equity portfolios on a global scale.

Even if the downturn is caused by the flight of foreign capital, the efforts made to attract the international investors was not a waste, according to Kurdieh.

“We always wanted global institutions to enter our markets and stabilise the volumes and bring a little more depth, and our markets are better off because of it.”

But the future may require more action to ensure that a sudden shift of capital does not destabilise the entire market. “We have to be prepared for this as local investors. Today we have to live with the fact that when international investors decide to reduce their exposure, it will impact us also.”